AB Foods share price: Primark owner updates on full-year performance

on Nov 8, 2016
Updated: Oct 21, 2019
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Associated British Foods (LON:ABF) has updated investors on its full-year performance this morning.

**Highlights from the company statement:**
Group revenue increased by 5% to £13.4bn and adjusted operating profit was 3% higher at £1,118m. In calculating adjusted operating profit, the amortisation charge on non-operating intangibles, profits or losses on disposal of non-current assets and any exceptional items are excluded. On an unadjusted basis, operating profit was £1,103m, 18% higher than last year which included a £98m exceptional charge. Revenue and operating profit both benefited to a small extent from a 53rd week’s trading activity in some of our businesses this year but this was offset by the consolidation of only 11 months’ results for Illovo as a consequence of the alignment of its year end with the rest of the group.

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These results take into account a change in our accounting policy for the valuation of Illovo’s sugar cane roots following the amendment of IAS 41 which now permits the valuation of such assets at cost less accumulated depreciation. This change reduced both adjusted and unadjusted operating profit in the current year by £8m and in the prior year, which has been restated, by £10m.

The currency markets in this financial year have been more volatile than in recent years, especially for sterling, our reporting currency. Sterling’s strength in the first half of the year had an adverse translation effect on the group’s results. In the second half, and particularly after the result of the EU referendum, sterling weakened and we benefited from translation, resulting in little net effect for the financial year as a whole. The biggest transactional exposures in our group are in British Sugar and Primark. Margins at British Sugar benefit from euro strength while margins at Primark are adversely affected by sterling or euro weakness against the US dollar. Because Primark hedges its exposures when orders are placed, the impact of sterling’s weakness will not be felt until the new financial year.

Finance expense less finance income of £50m was lower than last year’s net charge of £53m reflecting a lower average level of debt during the year. Profit before tax increased from £707m to £1,042m with the benefit of a substantially lower level of losses on disposal of businesses and exceptional items. On our adjusted basis which excludes these items, profit before tax rose by 5% to £1,071m.
Implications of the EU referendum

ABF is an international business with diverse interests across 50 countries and has a business model that, wherever possible, aligns food production with the end markets for its products. Primark operates discrete supply chains for its stores in each of the UK, US and eurozone and as a group we undertake relatively little cross-border trading between the UK and the rest of the EU.

The referendum on the UK’s continued membership of the EU has created some short-term uncertainties including a decline in the value of sterling. However, changes in legislation and trade agreements, particularly in the areas of trade tariffs and UK agricultural policy have the potential to benefit the group, and the current level of sterling offers UK food producers significant opportunities to replace imported food and build export markets. We are therefore engaging with a number of UK Government departments to ensure that the full range of opportunities and risks, as they affect ABF, are recognised.

Outlook

We expect the expansion of Primark’s selling space to continue in all of its major markets. AB Sugar will benefit substantially from this year’s increase in sugar prices and from reductions in its cost base. Grocery, Ingredients and Agriculture are expected to make further progress.

Assuming a continuation of current exchange rates, and following the significant devaluation of sterling, we expect group earnings to benefit from the translation of overseas profits. However, as Primark buys much of its merchandise in US dollars and sells in the UK in sterling, there will be an adverse effect, in the year, on its UK margins.

Taking all of these factors into account, at this early stage, we expect progress in adjusted operating profit and adjusted earnings for the group for the coming year.
As of 07:09 GMT, Tuesday, 08 November, Associated British Foods plc share price is 3,030.50p.

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